Is College a Rotten Investment?

Why student loans are not like subprime mortgages.

Here's a familiar story. Americans had a near-religious belief in the soundness of this investment. Uncle Sam encouraged it with tax breaks and subsidized it with government-backed loans. But then, in the 1990s and especially the 2000s, easy money perverted the market. Prices detached from reality. Suddenly, millions of Americans found themselves holding wildly overvalued assets. They also found themselves without the salaries or jobs necessary to pay off the huge loans they took out to buy the assets.

This is not just the story of American real estate. It is also the story of higher education, at least if you believe the dozens of differentthinkersandpublications that have come to this conclusion in the past few months. They say that higher education is a bubble, just like housing was a bubble, and that it is getting ready to burst. Famed entrepreneur Peter Thiel, for instance, insists that just about every degree is worth little more than the paper it is printed on: Schooling is not education, he says, and ambitious kids should drop out and skip forward to the workplace. New York magazine calls it one of "this year's most fashionable ideas." But is it really true?

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The housing and higher-ed narratives do align in some instructive ways. First, they share the same middle-class aspirational roots. A house and a college degree were for decades considered foundational parts of a good, stable, upwardly mobile life. Nobody ever thought a diploma would be worth less than what you paid for it, just as nobody ever thought that housing prices would decline.

Prices for the two goods spiked about the same time, too. The average sale price of a new home was $155,600 in Sept. 1995. It peaked at $329,400 in March 2007. The rise in the price of new homes tripled in comparison with the rise in the price of everything else. The same happened for college tuition, whose spiraling costs bounded past the general rate of inflation. The average price of tuition at four-year colleges, in constant 2007 dollars, climbed from $8,552 in 1980 to $20,154 in 2009.

There was no logical reason for these price escalations. Neither college educations nor homes had become less plentiful in relation to the size of the population, justifying a dramatic increase in price. Nor had a four-year education or an average new home improved significantly, at least not enough to justify the extraordinary costs. Irrational exuberance had seized both markets.

So how did Americans pay for their newly pricey houses and diplomas? Credit, for the most part. Easy money and the advent of securitzation—bundling loans into tranches and selling them to investors around the world—meant that banks and financial firms could afford to provide trillions of dollars in loans to individuals. Government backing—in education's case, from Sallie Mae and federal loan programs, and in housing's case, from Fannie, Freddie, and the home-loan banks—helped.

But rising unemployment and stagnating wages vitiated those McMansions and paper diplomas. You cannot afford your University of Minnesota degree if you don't earn a decent salary. Similarly, you cannot afford your terraced three-bedroom outside of Phoenix if you just lost your construction job. Prices got very high, then the economy started to sour. For housing, the bubble burst fast. So is higher ed about to do the same?

Probably not. The analogy is much feebler than it superficially seems, as a house and an education are fantastically different kinds of assets or investments.

A house is an investment vehicle much more like silver or stock shares than it is like a degree. It can be readily bought and sold. Americans had a housing bubble not just because they bought more homes, but because they speculated on homes, snatching them up, fixing them up, and pushing them back onto the overheated market. The asset-price bubble burst when people started defaulting and stopped buying.

No such market for college degrees exists: You cannot trade your University of Phoenix B.A. for a Yale degree when you start making the big money. In the words of Kevin Carey of the think tank Education Sector, "College degrees have value. ... But they have no inherent worth. They are secondhand testimony of something valuable—the knowledge and skills associated with a unique person."

A diploma is a polymorphous investment. It is a guarantor of higher lifetime earnings: The "college wage premium" for highly educated workers is in the tens of thousands of dollars per year. It is also an insurance policy against unemployment, a signaling device to employers and peers, a prestige line for your resume or New York Times wedding announcement, and a place to make friends and connections. Most importantly, it is a way to learn new skills and information.

It could be that Thiel is right, that college students, en masse, are overpaying for their educations. But it seems more likely that some college students attending certain types of schools are overpaying. If you want to be an aerospace engineer and have the chops to get into Caltech, the quality of the education, contacts, and fellow students on offer might really be worth $200,000 to you. A diploma from the school practically guarantees a good salary.

That is not true for many other institutions—particularly not for online, for-profit schools, the worst of which egregiously overcharge for worthless degrees. (The Washington Post Co., which owns Slate, also owns Kaplan, a for-profit higher education company.) But that marketplace is rapidly changing. The federal government is cracking down. Share prices for such companies have plummeted. Students have gotten savvier. Low-cost, high-quality competitors have entered the market. It might take some time. But tuition should drop too.

But what of the loan bubble, the outstanding pool of nearly $1 trillion in debt students have racked up paying those spiraling tuitions? It is worrisome, but mostly for the individuals on the hook for ballooning payments, not for the whole financial system, as with mortgage-backed debt.

For better or worse, students cannot discharge college loans through bankruptcy. (They can, of course, go belly up on their mortgages, credit cards, and other commitments.) Default rates are rising, but the government backstops against many losses and often actively pursues debtors. Plus, the pile of student-loan debt seems enormous. But in comparison with housing, it is peanuts. There is about $1 trillion in outstanding student-loan debt, versus $10 trillion in residential-mortgage debt. It seems unlikely it could trigger any kind of economy-wide crunch.

So, the broad question of whether a college degree is overpriced remains, particularly since many high-priced colleges seem incapable of competing for students on price and since wages have stagnated for so many sectors of the economy. But for now, nobody needs to beware a bubble.